This week saw further volatility in bond markets. August has been a very poor month for government bonds as yields in the UK and US have increased on fears that rates may go higher and remain elevated for longer. This week gilts caught a break as the bad news is good news scenario returned. The Purchasing Managers’ Indices for August show a much bigger slowdown in activity than had been forecast. The decline in services was particularly surprising given recent demand-driven inflation in many services sectors. These indices are usually much faster than official data in spotting changing trends and the PMIs show the UK and EU in contraction, and only modest growth in the US.
This allowed gilts to recover slightly as markets look at the already weak level of growth in the UK and figure it won’t take much to turn the Bank of England away from its higher-for-longer position. As ever, we should try to avoid reading too much into one month’s data, but the decline in house buyers, poor consumer confidence, and rising defaults and insolvencies also show further weakness for the UK.
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